"As a grand finale to one of the most eventful years in the Israeli telco space, the three main carriers in Israel are shortly due to launch the iPhone," says Merrill Lynch in a new market review. "The Israeli telecoms sector has had a particularly eventful year - ownership of the two leading players has changed, and the Mirs Communications Ltd. sale is gaining momentum (at last)."
Merrill Lynch analysts Haim Israel and Stephen Pettyfer say that Israel is a more fertile market for iPhones than the US, where only AT&T Inc. (NYSE: T) offers them. "We think it is unlikely to have a major impact on subscriber numbers or market share but that it will be positive for data revenue. Also as the three leading players are all offering iPhone we do not anticipate large-scale customer migration from one carrier to another or that any single player will be overburdened with marketing expenses."
The analysts note that Israel's three mobile operators - Cellcom Israel Ltd. (NYSE:CEL; TASE:CEL), Partner Communications Ltd. (Nasdaq: PTNR; TASE: PTNR), and Bezeq The Israeli Telecommunication Co. Ltd. (TASE: BEZQ) wholly-owned subsidiary Pelephone Communications Ltd. - have each committed to buying at least 80,000 iPhones, amounting to 2.7% of all mobile phones in Israel, and the analysts believe that the companies will sell even more.
Haim Israel and Pettyfer say, "The operators are expected to subsidize each phone by NIS 2,000; consumers will pay NIS 800. Customers will be charged a fixed monthly fee for the iPhone, a monthly call package and a fee for a monthly data package.
"Given the consolidation of the Israeli telecoms market there is little incentive for the operators to enter into a price war as this would hurt both profits and cash flows. In this context, we do not expect customers to get a direct subsidy for surfing. The immediate impact of the handset subsidy will be felt in lower profitability but the companies will benefit in the long run from an average revenue per user (ARPU) uplift due to higher data usage, subscription fees and the sale of iPhone related services."
Haim Israel and Pettyfer predict that 300,000 iPhones will be sold in the first year, amounting to 3.5% of all mobile phones in Israel. They believe that iPhones will boost the operators' ARPU by 30% (NIS 43), resulting in an average payback period of just 13 months.
The iPhone effect will not be uniform; they will affect Partner the most and Bezeq the least in the short-term but Partner will be the long-term winner because its post-paid subscriber base is above the national average. Arrival of the iPhone will also have a positive effect on the sales of other smart phones, but operators' subsidies risk becoming a negative game as they compete to gain market share in smart phone sales, and to capture higher data packages.
On the basis of this prognosis, Merrill Lynch reiterates its bullish view on Israel's mobile operators, with "Buy" recommendations for Bezeq and Cellcom, and a "Neutral" recommendation for Partner. It gives a target price of NIS 10 for Bezeq, compared with today's opening price of NIS 8.80; a target price of NIS 130 and $34.70 for Cellcom, compared with today's opening price of NIS 121 on the TASE and yesterday's closing price of $31.83 on the NYSE; and a target price of NIS 78 and $21 for Partner, compared with today's opening price of NIS 72.30 on the TASE and yesterday's closing price of $19.11 on Nasdaq.
Published by Globes [online], Israel business news - www.globes-online.com - on December 7, 2009
© Copyright of Globes Publisher Itonut (1983) Ltd. 2009